Saving for College with 529 Plans
From the May 2010 newsletter:
529 plans are one of the easiest ways to save for your child’s college education. Investment earnings are tax-free as long as withdrawals are used for qualified college expenses. And unlike other options, there are no income or age restrictions. There are two main decisions when opening a 529 account: which 529 plan to use and which investments to buy.
Although there are 529 plans sponsored by each state, you can open an account with a plan in any state. The main factors in selecting a 529 plan are: state tax benefits, expenses, and investment options. To keep your expenses low, the direct-sold plans (CA, NY, NV, etc) are your best bets.
Top 3 Problems with 529 Age-Based Options
529 plans are a great way to save for college, and most offer a very simple investment option called an “age-based option.” This option automatically shifts your portfolio towards bonds and cash as your child gets older. Conceptually, this works very similarly to a target-date fund for retirement.
As an example, let’s consider the age-based options offered by one of the most popular 529 plans, New York’s 529 Direct plan. The table below shows how your asset allocation would change over time in their 3 age-based options. Based on your child’s age and your risk preference, you can easily identify the portfolio that the age-based option would use:
